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By XE Market Analysis April 2, 2020 7:15 am
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    XE Market Analysis: North America - Apr 02, 2020

    A 10%-plus rebound in crude prices catalyzed gains in oil-correlating currencies, including the Canadian dollar and Norwegian krona, and other commodity currencies, while helping give stock markets a lift after a sputtering session in Asia. The pan-Europe STOXX 600 index was showing a 0.5% gain as of the early PM session, while S&P 500 futures were showing a near 2% gain. USD-CAD has dropped by over 0.6%, driven by a bid for the Canadian dollar amid a 10%-plus oil price surge. The pair posted a low at 1.4079, though has so far remained above its Wednesday low at 1.4060. A Bloomberg report, citing sources will inside knowledge, said that China is moving forward with plans to buy oil for its emergency reserves. Beijing is reportedly aiming to build up a crude stockpile that would cover 90 days of net imports with the possibility of expanding this to 180 days. China is the world's biggest oil importer and is taking advantage of the 60%-odd collapse in oil prices. Front-month WTI crude prices posted at six-day high at $22.55, but still remain down by just over 65% from the highs seen in early January. Both the Australian and New Zealand dollars rallied, although both remained within their respective Wednesday ranges against the U.S. dollar. USD-JPY and most yen crosses, particular those involving a commodity currency, have gained concomitantly with the improvement in risk appetite, which saw the yen's safe haven premium unwind some. EUR-USD had edged modestly lower today, but has remained above yesterday's one-week low at 1.0903. Sterling has once again ranked among the currency outperformers today, gaining over 0.7% versus the dollar and by over 0.8% against both the euro and yen on the day so far. Efforts by the Fed and other central banks to mitigate the liquidity crunch has been a particular boom to the pound, given the UK's outsized banking sector.

    [EUR, USD]
    EUR-USD had edged modestly lower today, but has remained above yesterday's one-week low at 1.0903. The pair has dropped over the last three days, from a 16-day high at 1.1148, but remains well above the low seen during the recent dollar liquidity crunch, at 1.0637, before the Fed and other central banks stepped in to satiate the demand for cash dollars. The U.S. 10-year T-note versus Bund yield spread has resumed its narrowing, falling today to below 103 bp, which may be helping limit EUR-USD's downside momentum. The spread was over 200 bp as recently as mid February, and the near 100 bp of narrowing is testament to the Fed's rate cuts and pledge of unlimited dollar supply. Bigger picture, what the relative political and economic impact that virus-containing measures will have in Europe and the U.S. are unclear, though the issue of the viability of the euro and the EU itself is once again being held in doubt by euroskeptics.

    [USD, JPY]
    USD-JPY and most yen crosses, particular those involving a commodity currency, have gained concomitantly with a strong rally in oil prices and gains in European stock market and U.S. stock index futures, which offset a mostly-down session on Asian bourse. Regarding the oil price surge, a Bloomberg report, citing sources will inside knowledge, said that China has move forward with plans to buy oil for its emergency reserves. Beijing is reportedly aiming to build up a crude stockpile what would cover 90 days of net imports with the possibility of expanding this to 180 days. China is the world's biggest oil importer and is obviously taking advantage of the 60%-odd collapse in oil prices. President Trump also talked up the prospects for Russia and Saudi Arabia coming to a deal that will halt the price war (which is threatening to bankrupt U.S. shale producers). The Fed's and other central banks efforts to stave off a liquidity crunch have helped calm markets, though the economic impact of worldwide virus-containing measures, which will persist for a still-unknown duration, remains a major concerns for investors. We continue to anticipate USD-JPY trading at sub-100.00 levels on the assumption that there will be more Japanese repatriation and more safe-haven demand for the yen in the weeks and months ahead.

    [GBP, USD]
    Sterling is again ranking among the currency outperformers today, gaining over 0.7% versus the dollar and by over 0.8% against both the euro and yen on the day so far. Market narratives have been pointing to the impact of the Fed's launching (announced Tuesday) of a new "FIMA" facility, which will start on April 6 and allow foreign central banks to obtain dollars without selling Treasuries. This will run alongside the swap lines created with 14 central banks, and the two should ease strains in global dollar funding. This is seen as a particular positive for the pound, given the the UK's recently proven vulnerability to global liquidity shortages, with its large financial sector and dependence on foreign investment inflows (equivalent to about 4% of GDP) to finance its large current account deficit. The pound had underperformed even commodity currencies during the worst of the recent global liquidity crunch, which ran from about March 10th through to March 19th, before measures by the Fed and other central banks provided a mitigating impact. Sterling lost about 10% of its value in trade-weighted terms over this period, and tumbled by 12% versus the dollar, hitting a 35-year low, and a 11-year low against the euro. The worst now looks to be over for the pound, especially with markets starting to bet that the UK will ask the EU for an extension of its post-Brexit transition membership of the Union's customs union and single market. Neither the UK nor EU has the resources to conduct detailed trade negotiations under the the prevailing circumstance of the coronavirus crisis. This is seen as sterling positive as it will avoid the possibility of the UK leaving the transition period and shifting a big chunk of its trade onto less favourable WTO trade terms.

    [USD, CHF]
    EUR-CHF has continued to gravitate around the 1.0600 level, holding above the five-year low that was seen on March 9th at 1.0505. Assuming the coronavirus crisis persists, as looks highly likely, this should maintain Swiss franc's safe haven premium, which at the least should limit upside scope of EUR-CHF. The U.S. in January added Switzerland to its list of currency manipulators. The move seems a bit rich given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index), though the Trump administration argues that Switzerland needs a more expansive fiscal policy.

    [USD, CAD]
    USD-CAD dropped by over 0.6%, driven by a bid for the Canadian dollar amid a 10%-plus oil price surge. The pair posted a low at 1.4079, though has so far remained above its Wednesday low at 1.4060. A Bloomberg report, citing sources will inside knowledge, said that China is moving forward with plans to buy oil for its emergency reserves. Beijing is reportedly aiming to build up a crude stockpile what would cover 90 days of net imports with the possibility of expanding this to 180 days. China is the world's biggest oil importer and is taking advantage of the 60%-odd collapse in oil prices. Front-month WTI crude prices posted at six-day high at $22.55, but still remain down by just over 65% from the highs seen in early January. This level of price decline in Canada's principal export, while it sustains, marks a significant deterioration in the Canadian economy's terms of trade. Assuming that China's buying spree won't close this gap substantially, given the glut of crude flooding the market, and given that demand will remain weak for a historically protracted amount of time, we anticipate that the Canadian dollar will remain apt to underperformance. USD-CAD revisiting its recent 17-year high at 1.4669 seems likely before long.

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